Warranty claim – liability cap, interest, Part 36, permission to appeal and stay of execution (Equitix v Fox and others) – Johnny Shearman

By Johnny Shearman

Johnny Shearman, Head of Knowledge and Legal Services, examines the recent judgment in Equitix v Fox which provides useful guidance on the effect of liability caps with respect to interest and costs associated with a claim, in Lexis®PSL.

This article was first published by Lexis®PSL on 04 November 2021.

Dispute Resolution analysis: The judgment in Equitix v Fox and others dealing with consequential matters provides useful guidance on the effect of liability caps with respect to interest and costs associated with a claim. While the underlying contract in this instance limited liability to £11m ‘in respect of’ a ‘claim under [the] Agreement’, the court held that a claim for interest and costs was not a claim made under the contract itself. Such claims are made pursuant to the court’s jurisdiction to make ancillary orders when determining the underlying claim. Accordingly, interest and the consequences of a successful Part 36 offer where not curtailed by the liability cap. A stay of execution pending appeal was sought but refused. The court reiterated that a stay is the exception rather than the rule. However, it was agreed that any monies should be held on account by the solicitors for the successful party pending the outcome of any appeal. Written by Johnny Shearman, head of knowledge & legal services at Signature Litigation LLP.

Equitix EEEF Biomass 2 Ltd v Fox and others [2021] EWHC 2781 (TCC)

What are the practical implications of this case?

Where parties wish to limit liability under a contract, careful consideration must be given to the construction of the liability cap.

In this instance, the underlying share sale agreement provided for a limitation on liability ‘in respect of’ a ‘claim under [the] Agreement’. A ‘claim’ was defined as ‘any claim under [the] Agreement for breach of Warranties’. Liability was capped at an aggregate limit (divided between the defendants) of £11m.

In determining whether the liability cap should apply not only to damages but also interest and costs, the court noted that there was no specific mention of interest or costs in the contractual provisions, as would be expected if litigants are forgoing important litigation rights. In addition, the court reasoned that the phrase ‘in respect of’ is narrower than a phrase such as ‘arising out of or in connection with’.

Accordingly, the drafting of the liability cap in this case was insufficient to limit interest and costs to the cap. The result was significant as it meant that these ancillary obligations were, in fact, uncapped and dependent on the court’s determination of applicable interest rates and the effects of a successful Part 36 offer.

While it is possible for parties to agree contractual provisions to curtail such ancillary obligations, for example by specifying contractual interest rates, clear and explicit wording is needed to achieve this. Typically, in such cases, the court will exercise what is set out by the parties in the contract. However, even in such cases, the court’s discretion to depart from the contractual position is not ousted. 

What was the background?

The underlying dispute between the parties concerned the sale of the shares in a biomass company by numerous individuals and another company. The terms of the sale were set out in a share sale agreement, which contained warranties given by the seller relating to the state of the business. The buyer, Equitix, brought claims against the sellers alleging numerous warranties to be false. The court found in Equitix’s favour. However, it was agreed between the parties that a liability cap applied to any damages arising out of a claim under the agreement. Accordingly, the court awarded damages up to the limit of the cap, which was £11m. See Equitix EEEF Biomass 2 Ltd v Fox and others [2021] EWHC 2531 (TCC) for the substantive judgment.

While it was agreed that a cap applied to the damages, the parties disagreed as to whether ancillary obligations such as interest and costs were also subject to the cap. The defendants argued that the cap should apply not just to damages but also interest on damages, any uplift under Part 36, costs, interest on costs and any order to make a payment on account. The claimant contended that the court should be slow, in the absence of very clear words, to infer an intention to abandon ancillary remedies otherwise open to the parties to a contract. This fell to be determined at a further hearing dealing with consequential matters.

What did the court decide?

For the reasons outlined above, the court found in favour of the claimant and agreed that the wording of the liability cap in this instance did not apply to ancillary obligations. Accordingly, the court was left to determine the following consequential matters:

Interest on damages

It was agreed that the claimant had made a relevant Part 36 offer, by letter dated 25 January 2021, that the offer was not accepted, and it was beaten at trial.

In determining when interest should start to accrue, the court found that there was no good reason to depart from the general rule that interest runs from the date of the cause of action. Equitix parted with its money on 5 August 2016 and did so in ignorance of the falsity of the relevant warranties. Accordingly, interest at a rate of 2% annum over base rate was awarded from that date. The court rejected any contention that the state of the pleaded case on quantum should impact the date from which interest should accrue.

However, in taking account of the Part 36 offer, the court awarded interest at the higher rate of 5% over the current base rate from the 16 February 2021 (the requisite 22 days after the Part 36 offer had been made). While the court can award up to 10% interest under the provisions of Part 36, the conduct of the defendants was not wholly unreasonable and a figure to the lower to middle part of the spectrum was awarded.

Costs and interest on costs

In light of the Part 36 offer, the usual position on costs was adopted. Costs were awarded on the standard basis for the period up to and including 15 February 2021. Interest on these costs was awarded at 2% over base rate for this period.

Indemnity costs were awarded from 16 February 2021 with interest accruing at 5% above base rate for similar reasons as to the award of interest on damages.

While costs still need to be assessed, as they do not fall under the liability cap, the court ordered a payment on account of costs of £1.25m. 

Permission to appeal and a stay of execution

The defendants were given permission to appeal on one of four grounds of appeal. Accordingly, a stay of execution pending appeal was sought on the ground that Equitix is balance sheet insolvent and would be unable to restore the defendants’ monies should the Court of Appeal correct the court’s decision and reverse the defendants’ liability. In exchange, Equitix was prepared to agree that any monies recovered should be held, pursuant to an undertaking, in its solicitors’ client account pending the outcome of the appeal.

Acknowledging that a stay is the exception rather than the rule, the court reasoned that the right balance was to not order a stay but to accept the undertaking of Equitix’s solicitors.

The court’s earlier finding that the liability cap did not extend to these ancillary matters was significant as it resulted in the defendants facing substantial additional financial obligations.

Case details

  • Court: Technology and Construction Court
  • Judge: Mr Justice Kerr
  • Date of judgment: 19 October 2021

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